CMP: INR158 TP: INR199 (+26%) Buy NTPC FY16 annual report analysis

BSE SENSEX S&P CNX 28,060 8,650 Stock Info Bloomberg NTPC IN Equity Shares (m) 158.0 52-Week Range (INR) 170/112 1, 6, 12 Rel. Per (%) 1/10/24 M.Cap. (INR b) 13449.0 M.Cap. (USD b) 20.1 Avg. Val, INR m 666 Free float (%) 30.0 Financials Snapshot (INR b) Y/E Mar 2016 2017E 2018E Sales 787.1 820.4 965.0 EBITDA 191.6 228.2 301.9 NP 101.6 96.5 119.0 EPS (INR) 12.3 11.7 14.4 EPS Gr. (%) 1.7-5.1 23.3 BV/Sh. (INR ) 108.2 115.1 124.1 RoE (%) 11.9 10.5 12.1 RoCE (%) 7.3 6.8 8.2 P/E (x) 10.5 14.0 11.3 P/BV (x) 1.2 1.4 1.3 Shareholding pattern (%) Jun-16 Mar-16 Jun-15 Promoter 70.0 70.0 75.0 DII 16.9 17.0 12.7 FII 11.0 10.8 10.0 Others 2.2 2.3 2.3 FII Includes depository receipts 27 August 2016 Annual Report Update Sector: Utilities NTPC CMP: INR158 TP: INR199 (+26%) Buy NTPC FY16 annual report analysis Core PAT up 18% Key takeaways from NTPC s FY16 annual report Core generation adj. PAT increased 18% YoY to INR81b, driven by capitalization of INR154b on addition of 2GW to DC. Losses at JVs declined from ~INR3b in FY15 to ~INR0.8b in FY16 on reduction of losses at Ratnagiri and improved performance of Aravali. Fuel cost declined 10% YoY to INR1.95/kwh. Gas & naphtha contributed 45% of decline in cost. Contingent liabilities toward fuel cost increased sharply by 2.5x YoY to INR21b. Contingent liability toward grade slippage was mentioned for the first time. We expect consolidated EPS to grow at 12% CAGR over FY16-20. Buy. Generation adj. PAT up 18% YoY NTPC s standalone (NTPCsa) FY16 PAT of INR102b came in flat YoY. Adjusted PAT was up 6% YoY to INR92b (Exhibit 1). NTPCsa generation adjusted PAT grew INR13b YoY (+18%) to INR81b in FY16, as per our calculations (Exhibit 2). Base RoE up 12%: Base RoE grew ~INR5b YoY (+12% YoY) to ~INR61b as regulated equity base increased by INR45b YoY to INR414b. Addition to gross block was INR154b on commissioning of 1,960MW capacity. Overall gross block, however, increased by INR183b to INR1,468b on foreign exchange and other adjustments. Base RoE contributed ~74% of generation PAT. PLF incentive: PLF incentive increased by INR0.5b YoY (+36%) to INR2.1b (pre-tax INR2.7b). Six plants had PLF of more than 85% in FY16, as against five plants in FY15. Performance at Singrauli improved particularly PLF of ~93% in FY16 from ~83% in FY15. PLF incentive contributed ~3% of generation PAT. Working capital interest: Actual debt (~INR931b) was lower than normative debt (~INR941b), implying working capital and part of project capital were funded by equity. Regulator allows normative interest return on such equity. Based on our calculation of normative working capital, NTPC earned ~INR11b (v/s ~INR12b in FY15) on pre-tax basis from working capital interest. It provided pre-tax rebate/discounts of ~INR5b for early payments and charged ~INR2b for late payments. Resultantly, net post-tax incentive from working capital was at ~INR6b (unchanged YoY). Return on excess equity in projects was insignificant (v/s. INR1.6b in FY15). The two components contributed ~8% of generation PAT. Heat rate and oil efficiency: Based on our estimates of station heat rate and oil consumption, NTPC earned ~INR1.9b from efficient operation of plant. Sanjay Jain (SanjayJain@MotilalOswal.com); +91 22 6129 1523 Dhruv Muchhal (Dhruv.Muchhal@MotilalOswal.com); +91 22 6129 1549 Investors are advised to refer through important disclosures made at the last page of the Research Report. Motilal Oswal research is available on www.motilaloswal.com/institutional-equities, Bloomberg, Thomson Reuters, Factset and S&P Capital.

Stock Performance (1-year) Under-recovery on O&M has declined: Under-recovery on O&M was down to INR0.6b in FY16 from INR6-7b prior to FY15. Weighted average normative O&M charge in FY16 was INR1.92/MW, while actual O&M was INR1.94/kWh. Actual O&M charge has declined from INR2.02/kWh in FY14 as water cess and capital spares are allowed on actuals under the 2014-19 tariff regulations. Normative O&M charge, on the other hand, has increased from INR1.84/kWh in FY14 as per the regulation. Other adjustments: Other adjustments were INR10b (v/s. INR1.3b in FY15), contributing ~13% of generation PAT. Fuel cost decline aided by lower gas and naphtha NTPC reported a 10% decline in unit fuel cost, from INR2.17/kWh in FY15 to INR1.95/kWh in FY16. Fuel cost declined ~INR50b YoY aided by decline in gas (~INR13b) and naphtha (~INR9b) on lower related generation and unit price. Decline in gas and naphtha represented 45% of the decline in fuel cost. Specific coal consumption was down 1% YoY to 0.70kg/kWh, third consecutive year of improvement in specific consumption. Rationalization and swapping of linkages provided annualized saving of INR0.8b. It swapped 0.5mt MCL/SECL each with SCCL for its Ramagundam plant. Simhandri rationalized 1.5mt linkage with MCL, replacing with ECL. Sipat swapped with GSECL 0.5mt SECL linkage. Contingent liability on fuel increased by INR15b YoY Contingent liability towards fuel was INR21b, up from ~INR6b in FY15. Contingent liability towards grade slippage was mentioned for the first time. However, this is a pass through item to the beneficiary. Working capital increased by 15 days YoY to 86 days on unbilled revenues Working capital increased from INR142b (70 days of revenues) to INR168b (86 days of revenues), primarily due to increase in unbilled revenues (INR25b in FY15 to INR50b in FY16). Unbilled revenue comprises primarily billing for month of March and partial billing on tariff orders that are yet to be approved. Subs/JV losses declined from INR3b to INR0.8b YoY Losses at subsidiaries and JVs declined from ~INR3b in FY15 to ~INR0.8b in FY16. NTPC has invested INR78b in its subsidiaries and JVs as at the end of FY16, representing ~9% of its net worth. Aravali s PAT increased from INR0.9b in FY15 to INR3.5b in FY16. Losses at Ratnagiri gas station were down from INR4b in FY15 to INR2.7b in FY16. Losses at subsidiary Kanti Biliee (profit of INR112m in FY15 to loss of INR378m in FY16) and JV Tamil Nadu (loss of INR434m in FY15 to INR1,374m in FY16), partly offset the gains above. 27 August 2016 2

Capitalization gaining momentum; EPS CAGR of 12% for five years There is a minor -3% to +2% change to our consolidated PAT estimated for FY17-20E post the annual report update. NTPC s consolidated EPS is estimated to grow at a CAGR of ~12% over FY16-20E. We expect DC to increase at a CAGR of 7.5% and regulated equity to increase at a CAGR of 15% over FY16-21E. RoE is expected to improve from 11.9% in FY16 to ~13.9% in FY20E. We value the stock at 1.6x FY18E P/BV. Our TP is INR199/share. Maintain Buy. 27 August 2016 3

Exhibit 1: NTPCsa adjusted PAT INR m FY12 FY13 FY14 FY15 FY16 Reported PAT 92,237 126,194 109,749 102,909 102,429 Adjustments: Less: Prior period sales 5,478 12,419 20,868 6,796 507 Less: Prior period/extra-ordinary income 3,136 17,138-128 3,338 2,082 Less: Tax for earlier period -1,548 1,589 4,370 19,525 24,535 Add: Income tax refunded to DISCOMs 2,661-2,460 2,700 13,994 16,937 Adjusted PAT 87,834 92,588 87,340 87,243 92,241 Source: MOSL, Company Exhibit 2: Generation adjusted PAT INR m FY12 FY13 FY14 FY15 FY16 Adjusted PAT 87,834 92,588 87,340 87,243 92,241 Less: Non-core incomes Other income 27,897 31,188 26,459 21,163 11,893 Consultancy revenue 1,427 1,268 1,127 1,098 1,171 Provision w/back 3,159 9,078 1,999 1,862 1,545 Add: Non-core expenses Expenses 1,639 1,327 1,107 2,424 2,204 Tax on other income 5,803 7,565 7,759 3,036 1,373 Generation adjusted PAT 62,793 59,946 66,622 68,581 81,210 Source: MOSL, Company Exhibit 3: Generation adjusted PAT break-up INR m FY12 FY13 FY14 FY15 FY16 Generation adjusted PAT 62,793 59,946 66,622 68,581 81,210 Base RoE 40,742 46,297 52,496 55,859 60,711 RAB 271,620 325,760 351,605 369,160 414,204 Tax recovery 4,020-1,421 4,685 0 0 PLF incentive 5,527 5,473 8,266 1,573 2,143 SHR efficiency 7,173 5,631 8,899 1,412 1,436 Secondary fuel oil efficiency 2,688 1,606 2,475 562 442 Aux/O&M net under-recovery -3,882-5,462-4,768-325 -355 Working capital incentive 7,624 6,565 5,300 6,539 6,314 Debt return on equity funding 566 686 1,154 1,613 26 Others -1,664 572-11,884 1,346 10,492 Source: MOSL, Company Exhibit 4: Working capital (INR b) and days of revenue Inventories, deb., pay. Unbilled revenue 64 64 56 56 66 56 5 2 19 51 43 42 Net advances No. of days (of revenue) - RHS 86 70 50 25 27 23 91 95 FY12 FY13 FY14 FY15 FY16 Source: MOSL, Company 27 August 2016 4

Financials and Valuations Income Statement (INR Million) Y/E March 2012 2013 2014 2015 2016 2017E 2018E Net Sales 620,522 657,370 789,506 806,220 787,055 820,402 965,002 Change (%) 12.7 5.9 20.1 2.1-2.4 4.2 17.6 Total Expenditure 483,260 486,699 592,401 634,280 595,423 592,185 663,147 EBITDA 137,263 170,672 197,106 171,941 191,632 228,217 301,855 Margin (%) 22.1 26.0 25.0 21.3 24.3 27.8 31.3 Depreciation 27,917 33,968 47,700 55,646 61,534 69,776 89,538 EBIT 109,346 136,704 149,406 116,295 130,098 158,441 212,317 Interest 17,116 19,244 32,031 35,704 41,513 49,478 73,406 Other Income - Rec. 27,897 31,188 27,601 20,789 12,341 14,330 10,696 Exceptional item 3,136 17,138-119 3,182 110 33 0 Profit before Tax 123,262 165,786 144,858 104,562 101,035 123,327 149,607 Tax 31,024 39,592 30,824 4,638-589 26,848 30,608 Tax Rate (%) 25.2 23.9 21.3 4.4-0.6 21.8 20.5 Reported PAT 92,237 126,194 114,034 99,924 101,624 96,478 118,999 Balance Sheet Y/E March 2012 2013 2014 2015 2016 2017E 2018E Share Capital 82,455 82,455 82,455 82,455 82,455 82,455 82,455 Reserves 650,457 721,421 790,843 738,485 809,511 866,411 940,884 Net Worth 732,912 803,875 873,297 820,940 891,965 948,865 1,023,339 Minority Interest 0 0 6,804 8,879 8,928 8,928 8,928 Loans 502,789 581,461 814,549 1,022,520 1,120,194 1,274,607 1,415,923 Deferred Tax Liability 6,369 9,153 12,393 12,656 14,094 14,094 14,094 Capital Employed 1,242,070 1,394,489 1,707,044 1,864,995 2,035,181 2,246,495 2,462,284 Gross Block 818,283 1,032,457 1,313,937 1,443,608 1,632,140 1,880,518 2,529,052 Less: Accum. Deprn. 365,719 403,096 471,858 525,077 587,180 656,956 746,494 Net Fixed Assets 452,564 629,361 842,080 918,530 1,044,959 1,223,562 1,782,559 Capital WIP 418,279 371,094 538,250 675,547 815,497 894,203 570,260 Investments 95,839 91,376 16,635 141 148 148 148 Current Assets 441,626 519,333 603,487 601,543 543,886 501,398 492,247 Inventory 37,029 40,572 59,885 79,725 79,592 62,878 66,655 Account Receivables 58,325 53,650 67,257 92,499 101,740 81,635 90,398 Cash and Bank Balance 177,643 184,902 186,876 161,390 57,370 51,700 30,009 Loans and Advances 69,377 113,790 173,875 190,883 202,075 202,075 202,075 Others 99,253 126,420 115,595 77,046 103,110 103,110 103,110 Current Liabilities 166,237 216,676 293,408 330,766 369,310 372,817 382,930 Payables 44,607 51,324 72,240 71,076 68,266 71,773 81,886 Other current liabilities 121,631 165,352 221,168 259,690 301,044 301,044 301,044 Net Working Capital 275,389 302,657 310,080 270,777 174,577 128,581 109,318 Application of Funds 1,242,070 1,394,489 1,707,044 1,864,995 2,035,181 2,246,495 2,462,284 E: MOSL Estimates 27 August 2016 5

Financials and Valuations Ratios Y/E March 2012 2013 2014 2015 2016 2017E 2018E EPS 11.2 15.3 13.8 12.1 12.3 11.7 14.4 Cash EPS 14.6 19.4 19.6 18.9 19.8 20.2 25.3 BV/Share 88.9 97.5 105.9 99.6 108.2 115.1 124.1 DPS 4.0 5.8 5.8 5.8 3.4 4.0 4.5 Payout (%) 35.8 37.6 41.6 47.4 27.2 34.2 31.2 Valuation (x) P/E 12.0 10.5 14.0 11.3 Cash P/E 7.7 6.6 8.1 6.5 P/BV 1.5 1.2 1.4 1.3 EV/EBITDA 12.0 11.1 11.3 9.1 Dividend Yield (%) 4.0 2.6 2.4 2.8 Return Ratios (%) RoE 13.1 16.4 13.6 11.8 11.9 10.5 12.1 RoIC (Post-tax) 15.9 16.0 13.7 11.2 11.9 10.1 10.7 RoCE (Post-tax) 9.0 9.7 9.4 7.4 7.3 6.8 8.2 Working Capital Ratios Debtor (Days) 34 30 31 42 47 36 34 Inventory (Days) 22 23 28 36 37 28 25 Payable (Days) 26 28 33 32 32 32 31 Leverage Ratio (x) Current Ratio 2.7 2.4 2.1 1.8 1.5 1.3 1.3 Interest Cover Ratio 8.0 8.7 5.5 3.8 3.4 3.5 3.0 Net Debt/EBITDA 2.4 2.3 3.2 5.0 5.5 5.4 4.6 Net Debt/Equity 0.4 0.5 0.7 1.0 1.2 1.3 1.4 Cash Flow Statement (INR Million) Y/E March 2012 2013 2014 2015 2016 2017E 2018E Profit/(Loss) before Tax 123,262 165,786 144,858 104,562 101,035 123,327 149,607 Interest 39,697 19,021 31,643 35,286 41,090 49,478 73,406 Depreciation 27,917 33,968 47,700 55,646 61,534 69,776 89,538 (Inc)/Dec in WC -23,494-5,971-13,109-11,694-36,422 40,325-2,427 Tax paid -17,607-28,956-26,867-20,100-14,584-26,848-30,608 others -11,109-28,896-18,917-16,242 1,452-14,330-10,696 CF from Operations 138,666 154,952 165,308 147,459 154,106 241,727 268,820 Capex -130,577-162,912-189,485-191,772-232,470-327,085-324,591 (Pur)/Sale of Investments 18,039 16,225 16,225 16,391 16,536 Acquisition in subsidiaries -6,847-12,503 0 0 0 0 0 Int. & Dividend Income 9,019 19,021 18,166 17,037 9,528 14,330 10,696 Other investing activities -1,938 18,851 145-16,514 CF from Investments -112,304-140,169-136,243-158,200-222,920-312,754-313,895 Issue of Shares Inc/(Dec) in Debt 52,135 72,624 93,854 205,811 80,528 154,414 141,316 finance cost -39,693-39,461-62,429-72,371-83,473-49,478-73,406 Dividend (incl. tax) -41,146-40,688-58,719-148,385-33,513-39,578-44,525 Others 13 0 203 200 1,252 CF from Fin. Activity -28,691-7,524-27,091-14,745-35,206 65,357 23,384 Inc/Dec of Cash -2,330 7,259 1,975-25,486-104,021-5,670-21,691 Add: Beginning Balance 179,973 177,643 184,902 186,876 161,390 57,369 51,700 Closing Balance 177,643 184,902 186,876 161,390 57,369 51,700 30,009 E: MOSL Estimates 27 August 2016 6

N O T E S 27 August 2016 7

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